In a significant setback for Indian exporters, with impact from 05 June 2019, the Trump administration decided to cancel the export incentive provided to India under the Generalized System of Preferences (GSP).
The GSP is a preferential treatment given by developing nations by the U.S. government to its exporters.
Generalised System of Preference
The GSP advantages included a duty-free entry from India to the United States of almost 1937 products, including chemicals, gems, and textiles.
In 2017, India was GSP's largest beneficiary with $5.6 billion in subsidies. Every year, the beneficiaries and products covered by the scheme are reviewed.
What is GSP?
As noted above, GSP is a preferential arrangement that offers concessions for developing nations, such as India, to import products from developed countries, including the US, EU, UK, Japan, etc., at highly concessional tariffs or even zero tariffs for many products.
In 1976, the United States introduced GSP for developing nations and imports a big amount of products from nearly 120 nations and territories designated as beneficiaries.
GSP's main goal was to provide assistance for growth and an opportunity for developing countries to use trade as a tool for improving their economy and getting out of poverty.
The developed countries, like the US, profit in the bargain by improving their competitiveness on the worldwide market by lowering the expenses of imported inputs used by their businesses to produce products in America.
Reasons for GSP:
The Trump administration has chosen to cancel GSP from all GSP recipient developing countries for 94 products. GSP withdrawal primarily includes agricultural and handicraft products and this order are efficient from 1 November 2018.
The main reason for US withdrawal of GSP from India is that India enjoys a US $22.9 billion annual trade surplus, which President Trump feels is hurting the US economy.
The trade surplus occurred because the total value of goods exported to the United States by India exceeds the value of goods imported from the United States by India
A trade surplus also reflects a net foreign-market inflow of national currency. It, therefore, enables to reinforce monetary value (Rupee v/s Dollar).
Reasons for the trade deficit:
First, he calls India a "very high tariff country" and has often cited Harley-Davidson's example of exporting motorcycles to India.
Second, the Trump administration feels that India has put in place a broad variety of trade obstacles that have severe adverse impacts on U.S. trade and feels that India has not taken appropriate measures to fulfil the GSP criterion.
In this regard, the Trump administration wants the following:
- Greater market access concessions from India, mainly for dairy and pharmaceutical products.
- The US pharmaceutical industry reckons India as the biggest market for its products and opposes the development of domestic generic industry initiatives in India that produce medicines at affordable prices for a range of new diseases.
- Remove prohibitions on storing data in international servers, cloud-computing, and mandatory access to source code among others. These policies will clearly curb the development of domestic digital platforms and industries in India.
Implications for India
The removal of GSP will leave a decent effect on India as in 2017-18 the nation enjoyed preferential tariff on imports worth almost 12 per cent of the total exports of $48 billion.
GSP withdrawal affects $6.35 billion worth of exports from India; exporters stand to lose net benefits worth $260 million annually.
For industries such as imitation jewellery, leather, agriculture, auto parts, chemicals and plastics, and pharmaceuticals, most of which are already experiencing a severe crisis, the GSP would worsen the situation.
We could see many more sectors being considerably influenced in the future, including the services sector, which has more than $28 billion of exports to the US.
On the other hand, as per the Washington Post, 90 per cent of Indian exports to America face normal US tariffs and hence United States will remain unaffected from the exit of the GSP program.
Steps that India can take:
India will have to immediately engage in a meaningful dialogue with the US and explain that the decision is fundamentally against the principles of discrimination between developing countries as enunciated in the Charter of WTO.
Also, in the wake of India becoming a strategic partner with the US, the arms export to India rose by 550% in 2017, making the US the second largest supplier of defence hardware and equipment to India.
Hence, it needs to be highlighted that India is doing its bit to reduce its trade surplus with the US.
Meanwhile, other measures that India can take to safeguard its interests are:
Provide support to products where GSP loss has been significant by extending rebate on state and central taxes levies so that the market for these products is not lost.
Look for other trading partners, like China and Russia. However, India will have to deal with other problems, like mounting trade deficit with China ($53Bn) and the long-simmering border dispute.
Curb the maximum price of pharmaceutical items manufactured by India like heart stints, knee implants, etc.
This massive blow to Indian exports has come at a juncture, when, oil bills are going up, rupee is slipping down against the dollar, unemployment rates are at an all-time high, there is an agrarian crisis in the country, in-flow of foreign investments has ebbed and the Indian economy is limping owing to global economic slowdown.
Modi government will have to address the issue with utmost ingenuity and not allow it to become another stumbling block for the “ache din” which the people of the country are eagerly awaiting.
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